The Bangko Sentral ng Pilipinas (BSP), private banks, economists and market watchers generally consider 2023 better than the previous year, and that the challenges and progress of the past 12 months will likely extend to 2024.
BSP Governor Eli M. Remolona Jr., who became the central bank’s seventh governor in June, said the BSP’s mandate of price stability is crucial in ensuring there is sustained economic growth.
To balance growth and inflation management, the BSP focuses on three key challenges: managing monetary policy in a supply-shock economy; digitalizing the banking system; and maintaining a safe and efficient payments system that serves the unbanked. The emphasis on digitalization started in 2017. By 2020-2021, the BSP has more confidence in enabling a reliable and safe payment systems that are increasingly shifting into digital form.
As an inflation-targeting central bank, the BSP’s main task is to ensure inflation remains low and stable, and it will do anything and everything to keep inflation within the target range of two percent to four percent.
As of end-November, the inflation has averaged at 6.2 percent due to supply shocks that were “large and frequent” since 2022 when the war between Ukraine and Russia broke out. Additional supply shocks were also due to pandemic-related containment measures, geopolitical conflicts, and weather disturbances. The BSP has not much control when it comes to a supply-driven inflation.
“Given that these supply shocks were already feeding into inflation expectations, the BSP pivoted and shifted to a more hawkish forward guidance on monetary policy. This timely pivot helped keep expectations fairly anchored around the target,” said Remolona in a recent forum.
Meanwhile, core inflation, which excludes volatile prices of food and energy, continued to decelerate to 4.7 percent in November, reflecting the impact of monetary policy. BSP’s monetary policy has a better influence over core inflation.
Fortunately, despite high inflation, the Philippine economy performed better than expected in the third quarter this year, it grew by 5.9 percent amid sustained household consumption and a pick-up in public spending. However, this growth rate is lower than 7.7 percent in the same period in 2022 but an improvement from the previous quarter’s 4.3 percent.
For the last quarter of 2023, the BSP expects “around” 5.9 percent gross domestic product (GDP) growth. The government target is six percent to seven percent GDP expansion for the full year.
2023 and 2024: Banking sector outlook
Remolona told reporters on Dec. 20, during his last press briefing for 2023, that maintaining a hawkish stance for a long time affects banking systems.
To contain high inflation and ensure a stable foreign exchange market, the BSP held on to a tightening bias that led to a cumulative 450 basis points (bps) rate increase to 6.5 percent target reverse repurchase (RRP) rate as of Dec. 14.
“There’s always the issue of financial crisis especially when you’re in an environment of high-for-longer,” he said. “In the past, high-for-longer has led to big bank failures … these are kind of warnings,” he added.
In the past 12 months, and even during the entire pandemic, the local banking sector has displayed resilience and strength. It was strong to begin with on the back of adequate capital adequacy ratios and manageable soured loans. It has continued to report incomes despite the Covid crisis. Financial system resources and other indicators continue to show an industry that can withstand global shocks, to a certain extent.
Earlier this year, several banks in the US and in Europe suffered bank failures. It stopped there and did not affect regional banks.
“Thankfully, these incidents did not lead to a global crisis. They were contained in time, I think, with very aggressive and very swift interventions by the regulators,” said Remolona.
However, he said, “this doesn’t mean there aren’t other banks that are also maybe in trouble that we don’t know about.”
“These incidents … did not lead to a contagion. At least not to us. They seem to be related to each other. There was no contagion that reached our shores. But the next one might happen in Asia,” he cautioned.
Remolona, who worked for the Bank for International Settlements and the Federal Bank of New York, assured local banks have the capacity to withstand trouble coming from offshore banking issues.
“We’re just trying to make sure our banks are resilient, with high capital adequacy ratios and high liquidity ratios. And we have ample international reserves. (We’re) just trying to be ready for worse,” he said.
As early as October this year, the BSP chief already made it known that BSP is prepared to release needed emergency liquidity measures to problematic local banks amid an environment of rising corporate debt.
The BSP can grant emergency loan facilities for solvent banks that have “serious” liquidity problems. The recent amendment to the Philippine Deposit Insurance Corp. charter has also given the BSP enhanced resolution authority.
Meanwhile, capital-deficient banks are placed under the central bank’s “ICU” or the prompt corrective action to help them recover and get back on their feet.
For now, Remolona said there are some risks that they are closely monitoring such as the interrelationship between firms in a conglomerate structure as this set up is usually vulnerable to a possible contagion which happens if a company or entity with financial problems will affect other firms within the conglomerate group.
The International Monetary Fund (IMF) has been cautioning the region to scrutinize the rising level of corporate debt as interest rates increase some more. Not just the private sector, but also the public sector or government borrowing has been flagged by the IMF as well.
But while the economy and the banking sector are not in any danger yet, Remolona is not taking any chances in strengthening systemic risk surveillance systems against contagion threats.
The economy and the financial system are intertwined, and any decision or monetary policy actions by the BSP will have an impact on the country’s growth trajectory and in the management of capital and funds, including debt payments both in US dollars and in peso.
The BSP-led Financial Stability Coordination Council which includes the Department of Finance, the Insurance Commission, the Philippine Deposit Insurance Corporation, and the Securities and Exchange Commission is in-charge of mitigating systemic risks which threaten the stability of the overall Philippine financial system.
Remolona, as FSCC chairperson, has noted that there are “several positives marking the local financial market” such as an expanding but moderately growing economy.
Not out of the woods yet
As far as inflation outlook is concerned, and its likely path over the medium term, the BSP chief said that “we’re still not out of the woods when it comes to inflation” especially in 2024.
“If there are further supply shocks then it makes it all harder,” he said.
For this year, the data-dependent BSP forecasts a risk-adjusted inflation rate of six percent. For 2024, the risk-adjusted BSP inflation forecast is 4.2 percent and 3.4 percent for 2025. Risk-adjusted inflation forecasts take into consideration events or factors that are expected to happen at some point in time
Last Dec. 21, the BSP announced that it will maintain the inflation target range of two percent to four percent for 2024, 2025 and 2026.
It said that it will “remain vigilant and data-dependent in deciding on monetary policy in order to steer inflation to a target-consistent path, fostering price and financial stability in the country.”
The three-year medium-term inflation target is consistent with BSP’s forward-looking approach to monetary policy formulation.
Meanwhile, the BSP is confident that inflation outlook is still supportive of economic growth, despite its current high levels.
The BSP said the enactment of structural reforms will encourage domestic economic activity, raise productivity, and help build a sustainable non-inflationary economic growth.
Despite an above-target average consumer price index (CPI) for the first 11 months of 2023, the central bank expects continued inflation deceleration in 2024 and in 2025, due to the limited demand-based inflation pressures amid improving supply conditions.
Remolona said they could consider reducing the policy rate when the CPI is comfortably within the mid-range of the target or three percent.
He also said that it is “unlikely to cut rates in the next few months” since BSP is still on a hawkish “high-for-longer” policy stance as far as forward guidance is concerned.
For the first quarter 2024, he reiterated that BSP forecasts inflation will go below two percent based on base effects, but come the months of April to July – also because of base effects – inflation will rise above three percent.
“But for the year (2024) as a whole, we hope we will be within the target range, closer to the middle (mid-range) of the target. Closer to 4% than to 3% for the year as a whole,” he added.
In the first three months of 2024, the BSP expects the El Niño drought or the prolonged dry period “will be bad” and for the second quarter “maybe” just as bad.
Remolona said the El Niño is a supply shock “more or less we’re anticipating” and is already factored in their current risk-adjusted inflation forecasts for 2023 and 2024.